Paul Ryan: A Swing and (Unfortunately) a Miss

by: Karl Denninger

I had somewhat high hopes. Unfortunately, they remain unrealized. From the WSJ's Opinion Page (authored by Paul Ryan; as a public figure, speaking to the public, it's fair game to be analyzed in full):

Congress is currently embroiled in a funding fight over how much to spend on less than one-fifth of the federal budget for the next six months. Whether we cut $33 billion or $61 billion — that is, whether we shave 2% or 4% off of this year's deficit — is important. It's a sign that the election did in fact change the debate in Washington from how much we should spend to how much spending we should cut.

No, it's not. $61 billion is less than 2% of federal spending. When 42% of federal spending is not funded but rather borrowed, it's like attempting to whizz on a raging forest fire and saying, "But I can whizz more and further than the other guy!" That may be true, but the outcome of the fire does not change.

No one person or party is responsible for the looming crisis. Yet the facts are clear: Since President Obama took office, our problems have gotten worse. Major spending increases have failed to deliver promised jobs. The safety net for the poor is coming apart at the seams. Government health and retirement programs are growing at unsustainable rates. The new healthcare law is a fiscal train wreck. And a complex, inefficient tax code is holding back American families and businesses.

That's true; no one person or party is responsible. Both parties and all 535 of you are responsible. You've been responsible for 30 years. You have run the following as an economic model for our nation:

[Click to enlarge]

Again, this is a very simple graph that nobody wants to talk about. It is computed as:

(⌂GDP - ⌂Debt) / GDP Last year

That is, it reflects the change in actual output in the economy that is funded by productive pursuits instead of borrowing. This is the true GDP, because borrowing to buy something (no matter what it is) simply makes a purchase today with funds you promise to provide tomorrow. It thus is a time-shift on output, but is not an actual addition to output.

You'll notice that for basically 30 years the answer to any form of economic stress has been to crank debt and leverage higher. In 2007, an astonishing 30% of net GDP (not growth, actual net GDP) was from borrowing. But this was not a one-year deal -- the pattern, and ever-increasing borrowing as a propping-up mechanism, was unbroken since 2000, and on a longer time-frame the pattern was evident as early as 1981.

The president's recent budget proposal would accelerate America's descent into a debt crisis. It doubles debt held by the public by the end of his first term and triples it by 2021. It imposes $1.5 trillion in new taxes, with spending that never falls below 23% of the economy. His budget permanently enlarges the size of government. It offers no reforms to save government health and retirement programs, and no leadership.

Our budget, which we call The Path to Prosperity, is very different. For starters, it cuts $6.2 trillion in spending from the president's budget over the next 10 years, reduces the debt as a percentage of the economy, and puts the nation on a path to actually pay off our national debt.

No, it doesn't. Among other things it will never happen. Remember that we had the same path allegedly before us in 2000. President Clinton claimed to be running a surplus. He was not; he was stealing the Social Security and Medicare tax revenues without counting their present and future liabilities. In the private sector, this is called fraud and people go to prison for doing it. In the government sector, this is called "responsible budgeting."

Our proposal brings federal spending to below 20% of gross domestic product (GDP), consistent with the postwar average, and reduces deficits by $4.4 trillion.

Maybe. If it happens. But we'll examine why it won't right here.

• Reducing spending: This budget proposes to bring spending on domestic government agencies to below 2008 levels, and it freezes this category of spending for five years. The savings proposals are numerous, and include reforming agricultural subsidies, shrinking the federal work force through a sensible attrition policy, and accepting Defense Secretary Robert Gates's plan to target inefficiencies at the Pentagon.

You doubled spending between 2000 and 2010. Why not roll it back to 2000 levels? Is there some particular reason you picked 2008? That was, incidentally, after eight years of Bush's insane budgetary pumping, and in fact the largest debt-expansion in the history of the United States on a total systemic level. This resulted in an unsustainable budget and you wish to roll back into the middle of that idiocy?

• Welfare reform: This budget will build upon the historic welfare reforms of the late 1990s by converting the federal share of Medicaid spending into a block grant that lets states create a range of options and gives Medicaid patients access to better care. It proposes similar reforms to the food-stamp program, ending the flawed incentive structure that rewards states for adding to the rolls.

Block grants don't change the numbers, just where they fall. This has been one of the hallmarks of the fraud the federal government has perpetrated upon the States and the people for the last 30 years. It is yet more arm-waving without substance, in that while your deficit goes down (some) the States go up (by the same amount or more). Since the states cannot run deficits and cannot issue debt, they find themselves trapped and forced to raise taxes.

The problem with this over the last 30 years has been manifested in a state tax system that has become rather punitive. Property taxes are out of control, largely due to this shifting of expense. Public pensions are unsustainable, but failure to recognize and deal with this problem has turned into a monstrous issue. Now that real estate values are contracting to a reasonable multiple of incomes, millages as a percentage of home value are skyrocketing, effectively doubling many people's tax burdens. This cannot continue, and yet the government proposes to force more of this bankrupt model on the states.

• Health and retirement security: This budget's reforms will protect health and retirement security. This starts with saving Medicare. The open-ended, blank-check nature of the Medicare subsidy threatens the solvency of this critical program and creates inexcusable levels of waste. This budget takes action where others have ducked. But because government should not force people to reorganize their lives, its reforms will not affect those in or near retirement in any way.

So in other words, it fails to address the problem for those already in or near retirement. That makes it an instant zero in terms of accountability.

Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of healthcare program that members of Congress enjoy. Future Medicare recipients will be able to choose a plan that works best for them from a list of guaranteed coverage options. This is not a voucher program but rather a premium-support model. A Medicare premium-support payment would be paid, by Medicare, to the plan chosen by the beneficiary, subsidizing its cost.

That's even worse. By failing to address the health cost issues, we are forcing the expense that government was going to bear back on people. The $100 trillion in unfunded mandate does not go away with this model; it is simply shoved up the backside of the citizens. Taking a $100 bill out of one pocket (taxes paid by consumer) and putting it in the other (the consumer who was going to pay the tax) does not change a damn thing. It is an arm-waving move that will force bankruptcy on the citizens directly instead of indirectly via the government. To call this unsustainable is being polite; it is in fact nothing other than financial fraud.

• Tax reform: This budget would focus on growth by reforming the nation's outdated tax code, consolidating brackets, lowering tax rates, and assuming top individual and corporate rates of 25%. It maintains a revenue-neutral approach by clearing out a burdensome tangle of deductions and loopholes that distort economic activity and leave some corporations paying no income taxes at all.

You're short on details here, Ryan. When you're prepared to take the tax code, shred it, and reduce it to something that fits within 10 legislative pages, double-spaced, I'll listen to you. That can easily be done with your two-bracket approach. You haven't, which means you don't intend to.

Again, you're a fraud.

Here are the facts: Your so-called "reform" won't reform anything. It will simply screw the citizens on health care, it will do nothing to fix the tax code and it won't produce the "savings" you tout.

That's a fact.

You want solutions? I've been writing on them in relationship to healthcare since the debate began. Nobody wants to have that debate in a public forum. I'm open to it; let's have at it, Paul. Or anyone else, for that matter. Dylan Ratigan? Glenn Beck? Hannity? Rush? Rachel Maddow? Does anyone want to have an actual debate on the issue? If you're in the media and would like to have such a debate, I'm very easy to find. Let's do it -- in public. Come armed with facts and figures and we'll have at it. This nation has long-deserved such a process and it has been notably absent.

On the rest of this "proposal," all I see is moving line items from one person's balance sheet to another's, instead of actual reform and fixes. That won't do; it's a fraud and our international creditors will see right through it.

We can solve these problems, but first we have to stop lying to the American people. And despite my hope that such was forthcoming from the Republicans, I see no evidence of that in Paul Ryan's proposal.